A ‘Spring Switch’ Could Still Be in Store

We're near the support line in the relationship of the Broker-Dealers ETF to the Dow

“The investor of today does not profit from yesterday’s growth.” – Warren Buffett

On March 15, I wrote that “Broker Stocks Signal Return of Retail Investor.” I took a look at the price ratio of the iShares Dow Jones U.S. Broker-Dealers ETF (NYSE:IAI) relative to the Dow Jones Industrial Average (DIA). I stated that “there is a very real uptrend in leadership occurring in those companies most sensitive to volume, asset growth and financial transactions. Money is betting on activity returning to the financial sector, with a lot of room for the ratio to run higher.”

Since then, I began writing about my next major “call” for the markets. Following the Summer Crash, Fall Melt-Up, and Winter Resolution, I addressed what I thought would be a “Spring Switch,” which is the idea that retail money switches out of risk-free and into risk assets in earnest.

However, market internals deteriorated following the first week of April, and yields on bonds fell, while stocks behaved resiliently. This coincided with the renewed fear that expressed itself in the bond market, and in turn by retail money, which continued to allocate into bonds. So the Spring Switch has yet to occur.

But of course, the spring isn’t over yet. Take a look below at the updated price ratio of the IAI relative to the DIA. As a reminder, a rising price ratio means the numerator/IAI is outperforming (up more/down less) the denominator/DIA.
Click to Enlarge

The trend did look to be firmly in place, as you can see from the uptrend that began in the middle of December and ended around late March of this year. As jobs data disappointed, the ratio completely collapsed as bets increased that the retail investor would not return to the market, as I have been predicting.

However, we are near the support line in the relationship of the Broker-Dealers ETF to the Dow. The trend remains lower, but if a bounce occurs, it could reignite the potential for money to rush into stocks as animal spirits return and be the first sign this season of a Spring Switch. If it does, playing the Broker-Dealers ETF on the long side could be a surprise winner.